Q3 2022 ASE Technology Holding Co Ltd Earnings Presentation
$3 8 billion from the previous quarter and up $8 7 billion from the same period last year.
This represents a 4% increase sequentially and a 10% increase year over year.
Gross profit for our ATM business was $28 8 billion up $1 1 billion sequentially and up $4 $1 billion year over year.
Gross profit margin for our ATM business was 29, 2% flat sequentially and up one eight percentage points year over year.
The sequential gross margins were flat primarily due to the effect of NT dollar depreciation offset by higher raw material product mix and higher utility costs.
The year over year gross profit margin improvement was primarily attributable to business scale benefits and NT dollar depreciation offsetting the negative impact of a higher raw material product mix and increases in other manufacturing costs.
During the third quarter operating expenses were $10 2 billion up <unk> 4 billion sequentially and $1 $1 billion year over year, our operating expense percentage was 10, 3% flat sequentially and up <unk> two percentage points year over year, the increase was driven by higher <unk>.
Salary and profit sharing expenses from achieving higher profitability targets.
During the third quarter operating profit was $18 7 billion, representing an increase of 0.7 billion quarter over quarter and an improvement of $3 billion year over year operating margin was 18, 9% flat sequentially and up one five percentage points year over year.
The NT dollar depreciating against the U S. Dollar had a positive 1.3 percentage point impact on our ATM sequential margins.
On a year over year basis, we estimate that the strengthening U S. Dollar had a three eight percentage point positive impact to margins.
Without the impact of PPA related depreciation and amortization ATM gross profit margin would be 31% operating profit margin would be 20%.
On page six youll find a graphical representation of our pro forma ATM P&L.
On page seven is our pro forma ATM revenue by market segment, the market segments were relatively unchanged as compared with the previous quarter with a percentage increase in communications and eight percentage point decrease in automotive consumer and others.
And though the automotive segment is not separately displayed here it continues to outgrow other market segments.
On page eight you will find our pro forma ATM by service type service type percentages were relatively stable with advanced packaging and wire bonding, each giving a percentage point to materials and others.
Seasonal softness within our advanced packaging and wire bond businesses compounded with the seasonality of our RF module production led to small percentage movements in each category.
On page nine you can see the third quarter results of our EMS business during the quarter demand was stronger than anticipated driven by higher loading and stronger than expected demand for both our traditional EMS and site services.
We believe some products may have an earlier manufacturing cycle when compared with the previous year customers in general have been proactive to produce earlier as a preventative measure against any unforeseen supply chain disruptions.
In terms of EMS profitability current quarter improvements were driven by increased scale of manufacturing and the strength of the U S dollar relative to the RMB, causing short term reductions in raw material costs recorded during the quarter.
During the third quarter, EMS revenues increased $24 4 billion or 37% sequentially and increased $29 5 billion or 48% year over year revenues were somewhat ahead of where we expected primarily as a result of higher than <unk>.
<unk>.
And traditional EMS business overall profitability for our EMS business improved with gross margin, increasing 0.1 percentage points to 10, 1%.
And reaching five 6% operating margin.
The RMB weakening against the U S dollar improved gross margins by <unk> eight percentage points during the quarter.
On the bottom half of the page you will find a graphical representation of our EMS revenue by application.
Application movements here are generally in line with underlying product seasonality with consumer and communications, peaking and other applications declining <unk>.
On page 10, you will find key line items from our balance sheet at the end of the quarter, we had cash cash equivalents and current financial assets of 62 billion. Our total interest bearing debt was $224 billion total unused credit lines amounted to $296 1 billion or.
EBITDA for the quarter was 38 6 billion net debt to equity was 53% our annual dividend payment was made during the third quarter, resulting in higher net debt to equity percentage.
On page 11, you will find our equipment capital expenditures machinery and equipment capital expenditures for the third quarter in U S dollars totaled $400 million of which $197 million were used in packaging operations $134 million in test.
Operations.
And $50 million in EMS operations.
$19 million in interconnect material operations and others.
We continue to provide our EBITDA in U S dollars here as a reference we believe that the company's EBITDA relative to our equipment Capex serves as a key financial performance metric for the company for the quarter EBITDA was $1 3 billion U S dollars.
Looking forward, we would first like to address the potential impact of the recent U S. A.
Our.
At this time believe that relatively few devices that are currently serviced by ASC fit the specifications indicated in the recently issued U S rules.
As such at this time, we do not believe there to be a material financial impact.
Nevertheless, we will continue to work closely with our customers to assess our future products may cross such thresholds.
Second in regards to the ongoing business environment as our COO Dr. Tien <unk> mentioned in our previous quarter's call. We believe the industry continues to be in a state of inventory correction.
Unexpected demand compounded with supply instability created an unprecedented manufacturing situation.
The volatile supply chain was unusually complicated as COVID-19 spread throughout the world.
Company is not only needed to order more products. They also had to deal with longer lead times and earlier order commitments.
As signs of cooling began towards the end of 2021 into early 2022.
Production continued at previously established rates.
This phenomenon appears to have created a higher level of inventory throughout the semiconductor manufacturing chain.
Now as most of the world adapts to an endemic Covid Society.
Semiconductor industry looks to reset back to a more normalized level of inventory in.
In the same light that our customers look to bring up overall inventory. They are now choosing to bring down inventory to adjust for lower manufacturing risk and a softening demand environment.
This is the framework of the current industry inventory digestion.
For the fourth quarter, we see a generally softening in environment, there will be some products that remain relatively strong but issues with potential recessions and anti inflationary policies.
Look to be dampening overall demand.
Even looking beyond the fourth quarter, our customer forecasts are also experiencing and an additional level of volatility as customers balanced inventory reduction with product demand.
Despite adjusting downward forecast movement are.
Our on balance very controlled.
We do see this environment continuing to stretch into the first half of 2023.
We believe that the interesting question to ask would be what impact will the inventory digestion period have an ASC and what will the impact be once it's over.
Of course, we don't have a magic crystal ball, but we can take an educated guess based upon three differences between the previous down cycle versus the up coming one.
First and foremost our combination with spill has been completed.
This increases our service offerings, and our pricing capability, even in a soft environment.
Second we have demonstrated that customers prefer ASC over our competition.
As a result, we continue to gain share and even more so in a downturn.
We estimate that we are roughly three times, the size and scale and pure ATM business of our nearest competitor.
With the sizable scale advantages comes competitive advantages in the form of lower cost and better yield.
Third heterogeneous integration paired with recent developments in advanced packaging technologies are encouraging our customers to rethink how their future products are designed.
ATM manufacturing processes are now becoming part of the mainstream methodology for increasing transistor density.
ASC is in a unique position to deliver additional value in these newly developing markets.
These competitive factors lead us to believe that we are in the most competitive position we have been in ever.
And as a result, we believe we can continue to outgrow our competition.
Even though next year, we see the logic semiconductor industry's prospects as being somewhat soft ASE can continue to outperform our competition.
It's definitely early and customer forecasts are not particularly firm, but if we were to guess at this point with the current information, we see a seasonally shaped, but flattish year ahead of us.
From a profitability perspective.
Reiterate our belief that annual structural margins have been lifted from peaking in <unk> historically between cycles between 20% to 25% to now from the mid <unk> to 30%.
Though we do not necessarily wish for a down cycle, we do understand that with one we will be given the opportunity to prove our strategic assessment and demonstrate our resiliency.
As a note we're trying to improve transparency and simplify the methodology used to provide our quarterly outlook. We have made a few changes in the way we provide our outlook part of this change includes using NT dollar figures with applicable exchange rate assumptions.
We see the U S dollar and NT dollar exchange rate going from 31 in the third quarter to 31 eight in the fourth quarter with those exchange rates in mind, we provide our outlook as follows.
For our ATM business in NT dollar terms, our ATM fourth quarter 2020 to business levels should be slightly below second quarter levels. This year as a reference our ATM second quarter revenues were NT dollar $94 9 billion.
Our ATM fourth quarter 2022, gross margin should be slightly below first quarter 2022 gross margin.
As a reference our first quarter 2022 gross margin was 27, 5%.
For our EMS business in NT dollar terms, our EMS fourth quarter 2020 to business levels should be slightly above third quarter levels. This year as.
As a reference our third quarter EMS revenues were <unk> dollars 97 billion.
Our Ams fourth quarter 2022 operating margin should be close to the operating margin in the same period last year.
As a reference our fourth quarter 2021 operating margin was four 4%.
Thank you.
We can start our Q&A session now.
Okay.
If you have any questions. Please raise your hand.
When you ask questions. Please hold two questions at a time thank you.
Now we have a question from Mr. Randy and brands of credit Suisse.
Okay.
Yes. Thank you okay.
First question I wanted to ask actually.
Your acknowledgment of the slowdown could you talk about the Capex outlook.
It looks like you slowed it down a bit for third quarter. If you could give a latest how you expect <unk> to come in and then also for 'twenty three and then within that you have had relatively better utilization of strengths on advanced technology.
Whether whether youre seeing that.
Start to slow or do you still see.
Into the coming quarters to be advanced holding up better than some of the mature wire bonding.
Yeah.
Yes, I think for this years Capex.
We'll bring that down a little bit.
Roughly around 10%.
Clinical next year, we're still in the process.
Formulating the overall outlook.
We will decide how.
How much.
The spending for next year.
In terms of utilization.
Three.
We continue to have pretty tight utilization.
With the assembly and test.
Over 80%, we're going into fourth I think the overall utilization.
It will range from 75% to 80% for both assembly and test with this.
<unk> capacity is slightly higher than the wire bonding.
Okay great.
Yes.
I guess I only get two okay.
Question I wanted to ask.
Actually if you could give.
A bit more detail about the margin.
It looks like in your guidance, it's going back to first quarter level of sales back to Q2.
A bit more debt despite currency being favorable so if you could talk about that trend and then also.
Yes.
I think you mentioned it should be a better pricing environment, but just how you are seeing that whether customer pressure competitive.
Competitive pressure.
How that's shaping up and then just the factor on the margin.
What's driving a little bit bigger decline there.
I think overall in the fourth quarter I think that pricing is still remains to be stable although.
We do expect that.
There will be a row going.
Moving back to a normal pricing.
Negotiation going into.
Next year.
In terms of margin of safety of course.
<unk> really.
The determining factor of our margin.
Going into quarter four because it was going to be some softness in terms of the overall utilization.
Is it volume.
It will come down.
So the margins certainly will have some impact in quarter three we have a.
Okay.
A bit of margin because of.
<unk> continues to be high.
But I think going into quarter four.
The margin prospects, we're looking at it related with ICR.
If this is already.
It also I think.
As we mentioned earlier.
Earlier.
Our entry into a higher cost structure higher.
Higher costs.
Because of you about the macro.
Situations.
Okay.
Next question is from MS Sohn, mainly in LC UBS.
Sonny.
Hi, Jimmy.
Yes.
Thank you so much for taking my questions.
My first question is.
Get your thoughts on how we should think about the seasonality going to flesh out with 2023.
I understand things are still moving pretty quickly.
Initial expectation will be appreciated thank you.
Doug you said Theres still a lot of surveys in front of us.
No.
No.
We're not giving out any.
As for first quarter, yet, but what we could sit as though we're going to see a normal.
Seasonality.
Please proceed with your play and typically the first quarter.
In the past.
Normal seasonality.
We should be looking at a 5% to 10% drop in the revenue.
Got it.
And then my second question.
If we look at the demand environment for the second half of this year.
Automotive server industrial are still relatively stable.
But how would you think about the sustainability going to early 2023, I guess in recent weeks, we started to hear from the supply chain regarding the increasing uncertainties. So just wanted to get your thoughts yet.
Also would.
Would you expect the IBM outsourcing to also slow down somewhat going to 2023.
I think so.
We're not there for them for a lady everybody else in the industry.
We are facing the same uncertainties in front of us.
And.
Our best estimate for the.
For the year is that we should be looking at a flattish year.
Given our position.
We remain confident that we will.
We will outperform the industry.
And also the.
All competitors.
Going into fourth quarter thing.
I think the same pattern remains automotive and networking will continue to be performing stronger than the other sectors and I think the industry.
Inventory digestion will continue.
The first half.
Next year.
Also the <unk>.
New restrictions.
<unk> by the U S.
We basically see so there are a lot of it will.
Moving parts in front of us.
Closely monitoring the situation.
Our next question is from <unk> Kumar.
Yeah.
Please state your company name before your question.
Yeah.
Hi.
Okay.
Okay.
Our next our next question is from Rick shoot.
Yeah, Hi, Keith.
Can you guys hear me yes.
Okay.
One question two.
Joseph.
Hi, guys I just wanted to clarify when you said.
And this year, you're looking for kind of flattish.
23 does that mean.
Total your total business or the total industry.
<unk> business or that the global semiconductor market.
What we're talking about ourselves I think Gil.
I think to general idea is that the.
Market returns.
Softer this year.
And.
But so.
So are our best estimates, we're looking at that overall situation of the customer forecast.
We see it we're still confident that we will all compete everybody else.
Maintaining at least flattish year for the for ourselves.
Terms of the ATM business.
Yes.
Another.
Factor to look at is that we believe that in.
Particularly in a downward.
Market situation.
Our market share expansion.
Actually accelerate given our leading position.
Right. Okay. Just one quick follow up can you give us some more color what's your view on the global semiconductor market next year.
Would that be where a bit decline in ore.
Just give us some direction.
Okay.
Well I think.
<unk>.
The chance of coming down.
So it has to be higher.
Okay, great Yeah that does help.
Thank you so much.
Yes, that's all I have thank you.
Youre welcome.
Next question is from Evelyn <unk> of Goldman Sachs.
Hello.
This is Bruce can you hear me Oh gross errors.
Alright, let me try to add some simple a simple question.
So can you give us what your parcel distribution.
How much of a capacity in China, how much is the phosphate from.
Different geographical location and what is the revenue coming from the different geographical location.
Boy came along.
And for me for your consumer and communication business, how much of that business and our capacity is coming from China.
Okay.
In terms of HCM, we have about <unk>.
7%.
Out of China in terms of capacity.
Yeah.
And our Taiwan operations global 85%.
Yes.
Yes.
60 some percent.
In China.
And the other is already that are all over the place.
So are you do you see.
Strong customer demand asking for Taiwan, plus one or China, plus one capacity or yes.
They're asking you to have some big upside I also have a Taiwan China.
Oh.
I don't thing is.
All of the years in terms of ACM.
Our <unk> ratio continues to be strong in Taiwan, because of the much larger and more complete infrastructure.
It's difficult to go outside.
So settle something new in the short run.
And I think all of the technology development of steel here. So I think the customers are still.
Pretty confident of that.
Okay.
With I wanted it's a safer bet with it but in terms of the <unk>, we do see more.
Requests from our customers too.
Further expand to outside of China.
And so.
So we are we are making a lot of progress in terms of extending.
Our capacity outside of China, including our investment in Poland.
In Vietnam.
Also in Taiwan.
Hi.
So which means that you don't have.
Well capacity are.
Or you don't have any plan to increase your non Taiwan, non China ATM capacity.
Okay.
Building off.
At this moment, we will continue to monitor the situation.
We will go where our customer wants us to go yes provided that makes commercial sense for us.
So let me say this.
It'd be a dynamic process, we will continue to monitor this issue.
The situation and make the right decision.
So current customer demand is not strong enough for you.
You have to make a decision to go aggressively to expand.
Capacity outside of Taiwan and China.
I think what youre, referring to is really the U S.
Yes.
<unk>.
There are some inquiries about whether we will be having something.
Sizable items.
In the U S.
Like I said, we are monitoring the situation to see.
How we can better address that with the tough comps.
I understand that.
Next question.
Question on the type of Polo Association.
I'm actually very surprised that you mentioned the first quarter Scott.
Well it will follow the seasonality.
Not the case for most of the foundry.
At this moment.
Looking at 16 and 20% sequentially.
The sequential decline in the first quarter, but most of our foundry Nims and if there is no wafer how can you have.
<unk> seen with Us Tonight.
Yes, So can you tell me where.
Why.
Can you tell me that my thought process, where this might go wrong.
There is a time lag between foundries.
Production.
And our production.
The wafer bank has already being there.
And we're looking at.
The quarter performance.
Based on the forecast that we're getting from our customers right now.
We do see.
Yes.
Normal seasonality pattern.
First quarter.
Alright.
That's a lot better than than than exploration.
One quick follow up for the <unk>.
So currently situations with those LTA you highlight a couple of quarters ago.
Also mentioned, some a little bit different pricing environment in the fourth quarter can you elaborate a bit more.
Well I think the LTA is fine.
Relative to a specialist.
Circumstances.
It's one of the ways for us to sit.
Secure a better relationship with our customers I think.
It is service purpose and the Otas are.
Going into retirement in this cycle now.
Coming next year.
No.
I think things will start to be normalized in terms of our pricing.
Negotiations.
Our position does give us good leverage.
To have a suitable pricing strategy.
That works for both ourselves and our customers and that would be.
That would be.
The pricing environment for next year.
Next question is from Jayhawk.
China Renaissance.
Oh, Hello, gentlemen, atrophy, yeah, two questions from me.
Restaurants is it possible to quantify additional cost synergy we can expect from the.
Can you spell merger, Chris can already mentioned that because the magic academic a small rich video.
The downturn.
Well of course.
The synergies come from.
Our business with negotiations with our customers.
It comes from some of the better.
Usage or better.
Hello allocation with a resource.
In terms of our R&D efforts.
In many different areas, we can have synergies created.
And.
Sharing of best known methods is also one of them. So that's really.
What Ken was mentioning earlier one.
<unk>.
Through the through the merger was fill it.
Does give us a.
Better cost structure and also more higher efficiency.
Facing a challenging environment now.
Paul maybe from the Opex intensity perspective.
With further improvement.
Well I think we have been making a lot of improvement in terms of our opex.
In.
Third quarter, our Opex ratio was.
Seven 6% down from.
Okay.
If we if we look at the same.
Period last year, it was 48, 2%.
So we're making a lot of progress in operating expenses and.
For quarter four.
The Opex ratio will remain at the similar level.
Quarter three so we will continue to have.
<unk> tight control over our operating expenses.
Okay.
Our next question is from Mr. Goldcor hunting Harlan.
Yeah, Hi, Thanks for taking my question and congrats on the resilience of the model, especially.
I had a couple of questions one could you talk a little bit about the inventory situation.
That you are seeing to be compared with the last maybe couple of cycles.
What based under the float banks that you see as the local reduce even with customers. It feels like inventory is definitely much more elevated compared to the last few cycles. So just wanted to understand.
Why you feel my first half of this year, we should be most of next year, we should be done within with the connection.
Do you think that it could take longer than first half of next year or two and a clear out the inventory.
I think the inventory correction already started.
Andrew.
First half of the year and is continuing I think is stretching a little bit longer.
What was originally expected.
Sure.
Same as everybody else.
We're expecting to see two less.
Ill.
First half of next year.
Partially.
It will be consumed.
And also some of the inventory will be actually replaced by the new products.
We introduce.
The next year.
Okay.
Sure.
Ralph.
Our indication for next year being flattish.
What is your expectation of industry.
Industry is down.
Mid single digit or something like that is that how we are thinking about how much ASE will outgrow the industry next year.
No I don't.
I don't know if you have a view of except.
Except in your like I said, the chance of coming down.
It's higher.
Understood.
And on pricing should we expect that.
We should see pricing going back to the maybe mid to high single digit kind of decline next year on we think when we talk about the more normalized pricing environment.
Still be better than the mid to high single mid enterprise declines that would be where it used to in the past.
It's going to be normalized pricing.
Environment and.
There will be price talks throughout the year.
But.
As I mentioned.
Opposition.
It gives us better.
Pricing capability.
Uh huh.
When we started the negotiation process.
We believe that we will have the capability to come up with a suitable pricing strategy.
That works for both ourselves and our customers.
And.
Like I said.
Like we mentioned so we do believe and work.
Very confident of that.
The margin that we'll get a half.
We'll move up.
Previously between cycles 'twenty.
20%, 25% now to mid 20% to 30%. So we remain confident that we will have a structural margin improvement.
If you have any question please raise your hand.
Please Holly two questions at a time.
Thank you.
Next question is from <unk> of China Renaissance.
Okay.
Hey, guys I have follow up at that regarding.
China ATM operation.
Can we assume that our ria, primarily staffing that domestic clients.
That factory.
Yeah.
Yes.
As war.
Local customers.
And I think the operation there remains to be.
Working quite nicely at this point at a healthy level.
We believe that will come next year it will remain to be.
A resilient operation of ours.
Okay and the other one on the dividend one.
Going forward for.
If I can policy would be.
Mark based on the payout based on the absolute dollar.
That though.
I think it was.
It will more or less.
Oh, Okay that means sticking to the ballpark around 50% right.
I'm sorry.
Alright, thats the ballpark is around 50%.
I think we have been paying out roughly 60% 65%.
Oh, Okay, alright, Okay got you.
Yes.
Yeah.
Yeah.
Next <unk> next question is from Mr. Goku Holly Hunt on Av.
J P Morgan.
Yeah, Hi, Thanks, one follow up question from my side could you talk a little bit about the demand environment in smartphones.
Being mostly demand weakness in the Android camp, but are you starting to see some demand weakness in the high end smartphones as well either becoming a little bit more broad based.
For your auto and industrial.
Demand.
<unk> now factored in any potential connection that demand as well next year or do you think that it will be reasonably resilient through most of next year as well unlike the rest of that.
Are we going to industry.
I think in automotive continue to speak.
The brightest spot at this point in the.
We do believe that the momentum will continue into next year.
In fact a.
Year to date I think our automotives.
<unk> has been growing very fast.
We have over 50% growth this year.
And from <unk> perspective, I think we will be able to hit the <unk>.
Mark.
And also for <unk> it will be.
It will hit the $700 million.
Alright.
We will continue to be strong I think.
In terms of Oems the original.
Goal was to reach $1 billion Mark by.
By 2024, I think the outlook that's going to accelerate.
Have a very very good chance in 2023, we're already recycle.
In terms of smartphone being across the board.
I think the Android system continues to be soft.
No.
In terms of unit growth.
In terms of unit volume.
It does come down but the.
One offsetting factor is the.
Rising.
IC content in it so.
It's kind of it's going to be softer but.
It's not going to crash.
Okay. Thank you very much.
Okay.
Our next question is from Randy Abrams of <unk> Suisse Randy.
Yes, thanks for taking the call actually wanted to ask just one on the U S side, which has had a very strong year and I think you discussed.
Pulling in a bit earlier bill.
Could you give a framework actually for that part of the business for next year, but first half coming off a high base and then full year.
And if you see any just ship and also traditional EMS with the outlet.
Or.
Yeah.
We're not going to talk about any customer in particular, but I think overall.
We remain confident that we will will be seen.
Growth in our EMS business come next year.
Okay.
That should still grow I mean, you talked auto still has a lot of growth, but overall it sounds like better than IC ATM from what Youre seeing.
Yes.
Okay.
The second question relates to the China, I know not much direct impact.
Could you discuss that.
Behavior and it might be early but one is if there is any changing.
More localization trying to like where.
Domestic customers prioritizing domestic and flip side international customers, if you've seen any inquiry.
There could be an incremental business.
Might have been using domestic I'm, just curious if you're seeing shifts in either direction there.
You mean the local.
Yes, like one would be China based.
China based customers that they start prioritizing even a bit more local supply.
And then the and then the flip side of international customers hit there.
I've been wearing actually move.
Get out from domestic OS apps, if theres been any shift.
Well I think.
<unk>.
Sure.
The customer come to us regardless.
Chinese customers or.
Other customers that they've come to us for value is now coming for you.
Geopolitical and this business is not.
Politicals.
Decision here I think you're right now, we're seeing that our Chinese customers.
<unk>.
Giving us normal forecast.
Much of it.
Movement, there because of the pension.
Okay, No that's good and it sounds like not much movement internationally either so.
Just kind of targeted uncertain part so no.
It's still going to deal with.
With a normal industry situation.
Okay, Great. That's helpful. Thanks, a lot. Thank you.
Yes.
Okay.
There is no more question.
Okay. If there is no more questions I will end the session.
<unk> and I think.
There is a lot of challenges ahead of US we are confident that we can weather this very nicely and given our leading position. We are very confident that we will continue to have a healthy year in front of us. Thank you very much.